Video Games: 3 Threats Facing Next-Gen Video Game Consoles

by Brad Moon | March 21, 2014 2:06 pm

GDC 2014 (Game Developers Conference) is underway, so naturally the news is full of feel good stories about video games, especially the recently launched next-gen consoles from Microsoft (MSFT[1]) and Sony (SNE[2]).

[3]Sony unveiled its Project Morpheus virtual reality headset for the PS4[4] and pointed out that, besides leading next-gen consoles in sales, the PS4 has so far exceeded Sony’s own targets[5]. Meanwhile Electronic Arts’ (EA[6]) new Titanfall — a Microsoft exclusive and one of the most highly anticipated video games for the new generation of consoles — has generated considerable excitement and reportedly boosted Xbox One sales[7].

Look a little deeper, though, and there is also a lot of not-so-good news.

Going into a crucial post-launch phase for these new video game consoles, both Sony and Microsoft have lost key division executives. Sony’s U.S. Playstation head is leaving after 20 years[8] even as Sony cuts 25% of staff from its North American game studio and axes a new PS4 title under development.

Microsoft, meanwhile, suffered the indignity of having its Xbox chief — the guy who has led all three Xbox projects and launches — announce he was quitting[9] just days before he was scheduled to talk about Xbox One’s leadership among next-gen consoles at GDC 2014.

Despite the fact that brand new consoles launched over the holiday season and gamers would typically be snapping up video games to play on them, sales of video games in the U.S. were down by 26% in January 2104[10] when compared to 2013’s numbers.

Flashy new next-gen consoles notwithstanding, this is beginning to look like an industry in crisis, not a problem specific to Nintendo’s (NTDOY[11]) struggling Wii U. We’ve compiled a list of three threats facing video game consoles.

3 Threats Facing Video Game Consoles: Cost to Develop Video Games is Skyrocketing

Video games are the new blockbusters[12] — they cost a fortune to make, and a hit title can bring in $1 billion in sales over a long weekend launch.

[13]That sounds good for video game developers, but it’s actually a worrisome trend.

Bringing an average game to market for the previous video game consoles could cost in the $20 million to $30 million range, but in order to take advantage of the new hardware and online capabilities of next-gen consoles, that average is expected to push $60 million. A blockbuster can cost much more.

With a $60 million entry fee, smaller studios can’t afford to play in the next-gen consoles leagues.

Titanfall, the Xbox One blockbuster took two years to develop. The final cost hasn’t been released, but EA’s big console title for 2013 Battlefield 4 required a $100 million expenditure; it’s not unreasonable to expect Titanfall to be at least in the same range, if not more expensive.

There’s room for independent studios to release smaller-scale games for a few bucks through the next-gen consoles’ online stores, but the mid-range is becoming too expensive for game studios to shoot for. Blockbuster video games could kill a company if they fail to perform at “blockbuster” levels.

The Playstation 3 has had around 800 video games released at retail, while the Playstation 2 had closer to 4,000. With a prohibitive cost of entry to develop video games for next-gen consoles, the risk of being displaced on store shelves by those blockbuster titles and a relatively small pool of Xbox One, PS4 and Wii U owners, there’s a good chance this round of video game consoles will have fewer games to choose from than previous generations.

It’s a bit of a chicken and egg thing, but fewer games is likely to translate into fewer console sales — which makes developing games for next-gen consoles even less appealing.

Fed up with the prospect of paying $60 for one game? Tired of being physically tied to the TV?

[14]A lot of people feel this way. And since they’re already carrying a smartphone or tablet and Apple (AAPL[15]) or Google (GOOG)[16] will sell them a casual game for 99-cents — or even for free — they’re happy to sacrifice graphics and depth for mobility and money to spend on other things.

Making it worse, those devices are getting more powerful and game developers are releasing titles that look an awful lot like console games.

The 64-bit A7 processor Apple puts in the iPhone 5s and new iPads combined with Infinity Blade3 (a title currently priced at $6.99) has graphics on par with the Playstation 3 and Xbox 360 video game consoles.

The game reportedly cost the developer slightly over $2 million to make, while the Infinity Blade franchise on iOS has been that developer’s most profitable game franchise ever[17] — and this is a company that’s released dozens of hit titles on the Xbox platform, including the popular Gears of War[18] series.

To make matters worse, we appear to be on the verge of a battle between Apple, Google and Amazon (AMZN[19]) to bring those mobile video games to the TV[20] via inexpensive streaming devices and set-top box.

The latest stats have video game sales dropping 11% in February[21], even as digital video games and free-to-play revenue (both dominated by mobile) are up 23% and 27% respectively.

Add-ons like VR headsets aside, once video game consoles are in production, their capabilities are pretty much set in stone until the next-gen consoles arrive. That’s usually seven years or so. Hardware can advance rapidly during seven years while video game consoles’ core specs remain unchanged.

[22]That wasn’t a big issue in the early days, but just look at what happened during the Wii, PS3 and Xbox 360 era. When the Xbox 360 launched in 2005, there was no iPhone, no iPad, no app stores selling 99-cent games, and only 10% of U.S. homes had HD TVs[23].

The new video game consoles are being called the first generation to be released with hardware that’s already outclassed by what’s currently available for PCs (one developer says 2 year-old, $150 budget PC GPUs outperform the Xbox One and PS4[24]), meaning video games developed for the consoles will quickly look dated compared to the PC version.

At the same time, mobile capability is increasing rapidly, there’s the threat of those cheap mobile games hitting the living room in a big way, and there’s competition like Valve’s Steam Machine[25] initiative nipping at their heals.

And we’re only months past the launch of the next-gen consoles. Who knows what innovative new technology will be released over the next few years that could completely disrupt the video games industry the way mobile did.

3 Threats Facing Video Game Consoles: Conclusion

Tech Crunch tallied the January sales for all video game consoles[26] (both next-gen consoles and older models) and compared that to the total number of units sold in January 2007 — the last time the video games giants had a holiday launch of new hardware. The numbers were telling.

[27]In 2007, the big three managed to sell nearly 2 million units North America in January. This year, that total comes in around 700,000.

Despite having more people to potentially sell to, makers of video game consoles are not only failing to retain their current levels of hardware sales, they’re losing ground in a big way.

Add that to the contraction in sales of video games and it’s clear the industry is not exactly booming.

With the threats currently facing Sony, Microsoft and Nintendo and the performance of next-gen consoles to date, it’s probably no surprise that some industry analysts are predicting the Xbox One, Playstation 4 and Wii U to be the last generation of traditional video game consoles to be released[28].

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.